One of our Supply Chain Matters Global and Industry Supply Chain Predictions in 2015 forecasted a turbulent year in global transportation and we predicted that such turbulence would take on a multi-year context, including additional acquisitions surrounding the 3PL and other transport sector in the year to come. The reason was obvious; as capacity continues to become either constrained or far exceeding market needs, service firms will either seek other partners or cash in on market leveraging opportunities. Indeed, such turbulence continues to manifest itself in many dimensions, and they are pointing to ever more important implications for multi-industry shippers, manufacturing and retail entities.
Last week, another rather significant, strategic and far-reaching announcement, that being XPO Logistics intent to acquire Con-way Inc. for an estimated $3billion, adds considerable industry implications.
As our 2015 transportation industry prediction published in mid-December of last year, FedEx announced its acquisition of GENCO, a premier $1.6B North America based specialty third-party logistics (3PL) provider that operated more than 130 warehouse and distribution facilities. In April, FedEx surprised the industry with its announced intent to acquire European based TNT Express for an estimated cost of $4.8 billion. Rival UPS had previously attempted to acquire TNT but ran head-on into regulatory based resistance. There have been many other smaller acquisition announcements but last week’s XPO Logistics announcement, by our lens, adds a new and more significant dimension with further implications.
According to the announcement, when this deal is consummated, XPO will become the second-largest North America based LTL, and a major player in contract logistics and multi-modal transportation services. XPO reports that Con-way Freight, Menlo Logistics, Con-way Truckload and Con-way Multimodal are to re-branded under the XPO Logistics banner. Indeed Menlo Logistics was probably the biggest crown jewel as was noted in the announcement.
Making this deal even more newsworthy is that Con-Way’s estimated revenues are nearly twice those of XPO. The announcement comes on the heels of the June announcement that XPO would acquire all the shares of France based Norbert Dentressangle SA in a stock tender offer.
The Con-way transaction is expected to close in October, subject to regulatory approvals. Con-way’s existing president and CEO will serve in a limited advisory role to the combined company through the first quarter of 2016.
This proposed combination will expand XPO’s global contract logistics platform by 22 million square feet and add an additional 160 facilities. The deal places XPO further into owning physical transportation assets. The announcement is quick to point out that XPO will remain asset-light, with net capital exposure of 3.3 percent of revenue, yet that base of revenue is far larger. XPO Logistics Chairmen and CEO Brad Jacobs noted to analysts that after buying Norbert Denrtressangle and meeting with customers, he realized how important owning assets was for large shippers.
Con-way’s existing vertical industry concentration among high tech, healthcare and retail join XPO’s concentration in aerospace, agriculture, chemical, food and beverage as well as telecom, making the combined entity a significant multi-industry player.
XPO indicates that it expects upwards of $40M in cost saving synergies in the integration of Con-way’s $200 million brokerage business to share capacity and data with XP’s proprietary Freight Optimizer technology. Other cost synergies were noted as improving a combined $3.6 billion in purchasing and supplier management related to fuel, equipment, marketing and professional services among the combined entity, along with eliminating duplicative back-office and technology operations costs.
In June, the 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals provided analysis and conclusions, one of which was:
“To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”
That conclusion was already known by major transportation service providers and the implication was the opportunity to lock-in on limited available capacity for pricing leverage.
In our annual Supply Chain Matters editorial commentary reflecting on the latest state of logistics, we concluded the following:
If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.
That advisory has even more significance today. The XPO acquisition of Con-way, if approved by regulators, will by our lens, more than likely provide the impetus for other major logistics and transportation providers to seek acquisition moves to lock-up capacity or industry concentration.
Industry supply chain leaders were already highly concerned with growing transportation costs, and now need to be even more watchful and diligent to the implications of these moves.
The signs of consolidation among global ocean container, surface trucking, or 3PL providers appear more prominent and the implications are becoming far clearer. If not already doing so, sales and operations planning, procurement and logistics team leaders should be educating senior management as to potential implications related to supply chain landed cost sourcing, B2B, B2C and Omni-channel customer fulfillment